Saudi Arabia sees first deflation in over a decade, may be short-lived

February 22, 2017 11:01 am

(Image source: Reuters)

Consumer price deflation hit Saudi Arabia in January for the first time in over a decade, official data showed on Tuesday, but plans for increased state revenues mean prices are unlikely to continue falling for more than a few months.

Prices fell 0.4 percent from a year earlier last month, their first drop since the early 2000s, and decreased 0.2 percent from December, the Central Department of Statistics said.

The falls were partly due to the weakness of the Saudi economy, where low oil prices have slashed the government’s export revenues and forced it to cut spending.

Last year’s economic slowdown pushed retailers and many other companies into discounting their products.

Food and beverage prices sank 4.2 percent from a year earlier in January partly because of a strong U.S. dollar, to which the Saudi riyal is pegged. The kingdom imports much of its basic foods.

A third factor was the government’s decision to raise prices of domestic fuel and utilities around the end of 2015 in order to cut its budget deficit. Those hikes dropped out of calculations in January this year, causing a sudden decrease of inflation.

Pressure up

Pressure for prices to rise is expected to increase within months, however. The government plans another round of fuel price increases in mid-2017 and has said it will impose a 50 percent tax on soft drinks and a 100 percent levy on tobacco and energy drinks in the second quarter of this year.

The government plans to raise fees for foreigners’ work permits and their dependents’ visas, starting this year, and intends to introduce a 5 percent value-added tax in the first quarter of next year.

Also, the non-oil economy appears to be recovering moderately as the government resumes paying its debts to the private sector, after a freeze on many payments for most of last year. The recovery will boost underlying price pressures, London-based Capital Economics said in a report.

“We think this period of deflation is likely to prove short-lived,” said Capital Economics, which has predicted inflation will bounce back above 4.0 percent after the value-added tax is introduced.

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Reuters
By Reuters
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